"When Others Make 10%, I Make 20": Leveraged ETFs Sweep the Top 10 in Returns [Personal Finance Barometer]

All top 10 ETFs by return this year are leveraged
High returns possible, but risks are substantial
Single-stock leveraged ETFs also set to list

As the stock market rally continues, interest in leveraged exchange-traded funds (ETFs) is growing. The prospect of earning twice the daily return is seen as a key factor drawing investors' attention. In particular, investor interest is intensifying as the government is currently pushing to introduce single-stock leveraged ETFs. However, experts advise caution, warning that leveraged products can cause large losses in highly volatile markets.

On the 13th, at the dealing room of Hana Bank's Seoul headquarters, an employee monitors the stock market and exchange rates as the KOSPI, having briefly surpassed the 5,550 level intraday, holds steady.

Investors Flock to Leverage for Double the Return

According to ETF Check on the 19th, leveraged ETFs have dominated the ETF performance rankings so far this year. As of the 12th, the ETF with the highest gain this year was TIGER Semiconductor TOP10 Leverage, which rose 85.40%, followed by KODEX Semiconductor Leverage (84.35%), TIGER 200 IT Leverage (69.78%), KODEX Leverage (65.51%), PLUS 200 Futures Leverage (65.39%), TIGER Leverage (65.35%), TIGER 200 Futures Leverage (65.29%), HANARO 200 Futures Leverage (65.19%), ACE Leverage (65.10%), and RISE 200 Futures Leverage (64.86%). All of the top 10 ETFs by return were leveraged ETFs.

Exchange-traded notes (ETNs) show a similar pattern. Hana Leverage Semiconductor ETN posted the largest gain with an 86.73% increase, followed by Kiwoom Leverage Semiconductor TOP10 ETN (86.71%), N2 Monthly Leverage Defense Industry Top5 ETN (70.07%), KB Leverage KOSPI 200 Futures ETN (65.71%), and Mirae Asset Leverage KOSPI 200 Futures ETN (65.15%), with leveraged products occupying all spots from first to seventeenth place in terms of returns.

Leverage products are designed to track twice the underlying index's daily return. For example, in a leveraged ETF where the KOSPI is the underlying index, if the KOSPI rises 1%, the ETF increases 2%, and conversely, if the KOSPI falls 1%, the ETF drops 2%. In Korea, only 2x leveraged products are allowed, so there are no 3x leveraged products as seen in overseas markets.

As the stock market continues its strong uptrend, investors are flocking to leveraged ETFs in pursuit of double the return. According to ETF Check, the ETF most heavily net-bought by individual investors over the past week was KODEX KOSDAQ 150 Leverage. During this period, individuals recorded net purchases of KODEX KOSDAQ 150 Leverage totaling 202.6 billion won. Since the beginning of the year, they have bought 1.6096 trillion won worth.

With more investors seeking to invest in leveraged ETFs, the Korea Financial Investment Association's online education site has even experienced outages. Under the current system, individual investors must complete an online course at the Korea Institute of Financial Investment to invest in leveraged ETFs or ETNs. After completing the course, they must obtain a completion number and register it with their securities firm before they can place orders.

However, investors should not jump into leveraged ETFs solely based on the promise of double returns. Leverage is a high-risk, high-return product, meaning the risk is as great as the potential profit. The most important point of caution in leveraged ETF investing is the "negative compounding effect." For instance, if the index starts at 100 and rises 10% on day one and then falls 10% the next day, the index goes from 100 to 110 and then back down to 99, which is almost unchanged. In contrast, a leveraged product would go from 100 to 120 and then down to 96. While the underlying index is down 1%, the leveraged product is down 4%, quadrupling the loss. If such a pattern repeats, losses can snowball. Investors must keep in mind that even if the underlying index returns to its original level after a decline, a leveraged product can still incur losses.

Nam Yongsoo, Head of ETF Management Division at Korea Investment Management, said, "Because leveraged ETFs track twice the daily return, they differ from simply doubling the return over a given period," adding, "If the underlying index repeatedly rises and falls by the same magnitude, the return on a leveraged ETF will continue to decline. Ultimately, the greater the volatility, the more disadvantageous leveraged products become for long-term investment, and investors should bear this in mind."

Single-Stock Leveraged ETFs Expected to Launch as Early as the First Half of This Year

Attention is also focusing on "single-stock leveraged ETFs," which are expected to launch as early as the first half of this year. Until now, domestic ETFs have been subject to restrictions such as a maximum 30% weighting per single stock and a requirement to hold at least 10 different stocks, making it impossible to introduce single-stock leveraged ETFs in Korea. The financial authorities plan to ease these rules by revising enforcement decrees and regulations in the second quarter of this year so that 2x single-stock leveraged ETFs can be launched domestically.

Unlike index-tracking ETFs, single-stock leveraged ETFs have the advantage of allowing investors to concentrate a relatively small amount of capital in high-quality individual companies. Because they aim to deliver a multiple of the daily return of a specific stock, investors can expect substantial gains in a rising market. However, if the stock is highly volatile or the market is in a downturn, losses can be equally large.

Up to now, despite currency conversion costs and high taxes, domestic investors have had to invest in single-stock leveraged ETFs overseas. According to "SEIBro," the securities information portal of the Korea Securities Depository, Palantir 2x Leverage ETF (PLTU) recorded net purchases of 163.88 million dollars over the one-month period through the 11th, ranking eleventh among domestic foreign-currency securities investments in the U.S. stock market. Over the same period, Tesla 2x Leverage ETF (TSLL) recorded net purchases of 107.28 million dollars, ranking twentieth. Korean investment capital is also pouring into Samsung Electronics and SK Hynix 2x leveraged ETFs listed on the Hong Kong stock market. Over the past month, domestic investors recorded net purchases of 5.74 million dollars in Samsung Electronics 2x Leverage ETF and 3.40 million dollars in SK Hynix 2x Leverage ETF.

If single-stock leveraged ETFs on blue-chip names such as Samsung Electronics, SK Hynix, and Hyundai Motor are introduced in the domestic market, they are expected to capture this demand. Kim Insik, researcher at IBK Investment & Securities, said, "Given that individual investors' preference for leveraged investments has already been confirmed in their overseas ETF investments, domestic listed products are highly likely to absorb part of the demand currently flowing into direct overseas investments."

The expanding range of ETF products also broadens the menu of investment strategies. Park Seungjin, researcher at Hana Securities, said, "Leveraged and inverse ETFs based on single stocks rather than indices make it possible to increase a portfolio's beta (sensitivity) or to take short positions, thereby enabling a wider variety of strategies."